Kiwi Set to Rebound as Traders Wager on Hikes From Hawkish RBNZ

(Bloomberg) -- The New Zealand dollar looks poised to recover from its sharp selloff this month, with technical support, a yield advantage over the U.S. and hedge-fund bets pointing to gains in the kiwi ahead of a pivotal central bank decision.

A 50 basis points hike by the Reserve Bank of New Zealand on Wednesday could amplify gains, while a 25 basis points increase would risk disappointing the market, undermining a rebound in the currency. Swaps traders are betting that a quarter-point hike is a done deal, with wagers split on a half-point hike.

Long positions in the currency from hedge funds have been rising for months and are at the highest level since March, while technical charts show the currency edging back toward the center of an ascending trend channel. Adding to the upbeat tone, two-year inflation expectations that climbed to a 10-year high on Thursday saw the kiwi erase a week’s worth of losses in a matter of hours.

“Given the outlook for RBNZ rate hikes we no longer forecast further New Zealand dollar downside,” Commonwealth Bank of Australia strategists including Joseph Capurso and Kim Mundy said in a Nov. 19 note. “New Zealand dollar can appreciate further if the RBNZ is required to tighten more (or faster) than expected to constrain inflation.”

Commonwealth Bank sees the kiwi supported into year end, despite a strong greenback, and forecasts it will rally to 75 U.S. cents by the end of 2022. Projections compiled by Bloomberg suggest the currency may rise to 71 cents this quarter and 73 cents by the end of next year. It closed Friday at 70.04 cents. 

The widening yield gap between yields on New Zealand’s sovereign bonds and Treasuries adds to support, while also pointing to downside potential for the currency if the Federal Reserve begins hiking rates faster than expected.

It is also noteworthy that the kiwi has given back about half its gains since the RBNZ raised its benchmark rate on Oct. 6 amid the greenback’s November rally. 

“There is plenty of risk with the Fed and how this could keep the dollar stronger for longer,” said Paul Mackel, global head of FX research at HSBC Holdings Plc in Hong Kong. “Standing in front of that freight train could be tricky.”

Here are the key Asia-Pacific economic data due this week:

• Monday, Nov. 22: Taiwan unemployment rate and export orders, Malaysia foreign reserves, Hong Kong CPI composite
• Tuesday, Nov. 23: New Zealand retail sales, Taiwan industrial production and imports and exports, Singapore CPI
• Wednesday, Nov. 24: RBNZ official cash rate, Japan PMI, Singapore GDP, Philippine balance of payments
• Thursday, Nov. 25: Australia private capital expenditure, New Zealand trade balance, Bank of Korea 7-day repo rate, Hong Kong exports
• Friday, Nov. 26: Australia retail sales, Taiwan GDP, Tokyo CPI, Thailand foreign reserves, Malaysia CPI, Singapore industrial production

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